How to Keep Inflation from Killing Your Retirement Dreams


Inflation means that the money you save now will be worth less in the future. When you’re a senior trying to get by on a fixed income, inflation is the biggest threat to your future security. If you’re nearing or already entering retirement, you might think that inflation isn’t a concern for you; but even 10 or 15 years of inflation could make a huge difference to your purchasing power. If you’re living on $35,000 a year now, for example, inflation means that you’ll need $47,037 to live according to the same standard 10 years from now.

How can you beat inflation? You’ll need to be aware of which necessities will probably cost the most in the future, so you can prepare for those expenditures. You can make investment decisions that will help you curb the effects of inflation on your retirement purchasing power. You should also do what you can to minimize expenses in retirement.

The True Cost of Inflation
The average rate of inflation is about 3.22 percent a year. That doesn’t sound like much, but it adds up, especially over 30 or 40 years. For example, even a lower-than-average 2.5 percent rate of inflation would mean that one dollar today will be worth just 48 cents in 30 years. If you’re retiring sooner than that, you still lose an uncomfortably large chunk of your dollar — it’ll be worth just 78 cents in 10 years, and that’s still counting on a lower-than-average inflation rate.

As discussed above, the average rate of inflation means that if you retire at age 65 in 10 years, you’d need more than $47,000 to maintain what is today a $35,000-a-year lifestyle. But those numbers keep going up each year, because inflation doesn’t stop when you enter retirement. By the time you’ve been retired for 20 years, you’re going to need $63,214 to live that same modest $35,000-a-year lifestyle; if you lived to be 99 years old, you’d need $95,617 to maintain your lifestyle.

Beat Inflation with Wise Investing
You should invest in the stock market to help your retirement funds continue to grow at a pace that outstrips inflation. Stocks are the only investment vehicle that has consistently outpaced inflation over the years. However, you don’t want to put all of your money in stocks; you want to invest 30 to 40 percent of it in less risky securities like bonds.

Inflation Tension
Inflation-protected securities or IPSs can help protect your money from inflation while at the same time giving you a hedge against market volatility. Treasury inflation-protected securities or TIPS are one such security; they’re backed by the U.S. government so they carry little risk. The semi-annual inflation adjustments you’ll receive on these securities are considered taxable income, but you can avoid paying this tax on money that you don’t even have yet by holding the TIPs in a tax-deferred account or buying a TIPs mutual fund. You may also want to consider investing in some other IPSs, like inflation-protected savings bonds or inflation-linked CDs.

Another way you can protect your retirement fund from the effects of inflation is to put your money into a Roth IRA. You’ll have to pay taxes on the money up front, but you’ll get it back tax-free in retirement. Many investors choose a Roth IRA because they expect to be in a higher tax bracket once they retire, but it also protects you against the possibility of future hikes in income taxes and gives you one less expense to worry about later on.

Work With Inflation by Cutting Expenses
Since your money will be worth less in the future, you may want to simply consider spending less of it. While you’ll want to make sure that you have enough money to be comfortable, there may be some ways you can cut your living expenses without sacrificing your quality of life. Try to be debt-free in retirement; if you don’t have a credit card bill, car payment or mortgage to worry about, your money will go a lot further.

You may also want to simplify your life. Move to a smaller house or a cheaper part of the country. Cancel the landline phone and just use your cell phone. Keep your old phone instead of upgrading to a smartphone. Get a Netflix subscription instead of cable. If you haven’t retired yet, experiment with simplifying and reducing expenses to reach a minimum figure on which you can comfortably live without feeling deprived.

Inflation eats away at everyone’s purchasing power as the years roll by — it’s the reason why simply sticking your money in a savings account won’t be enough to get you through your retirement comfortably. If you make the right financial decisions, however, you can beat inflation and live comfortably in retirement on the money you’ve been saving all your life.

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